One of the most profitable investment strategies that we have found in the last few years is through investing in Houses in Multiple Occupancy (HMO’s). HMO’s have risen in popularity over their brief history, due to the changing and more transient nature of some tenancy demographics.
What is an HMO?
A House in Multiple Occupation (HMO) refers to any property that houses more than three people who are not from the same family. Instead of one family residing there, you can rent to multiple people who are not related. The legal definition is the simplest, but in reality, the use of these types of properties can be much more diverse than you think. Find out more by reading What HMO is best for me?
HMOs have several benefits over the traditional buy to let model. They can be designed to suit any income level, and offer a unique opportunity for investors.
What is involved in HMO investing?
HMO investing is not the most suitable model for a beginner investor to tackle alone. It is more complicated than a traditional buy to let model, and the process for purchasing and renting an HMO can be quite tricky.
Some investors prefer to get involved in different aspects of an HMO purchase before investing. Although this is a great way to learn, at Hoxton Property we provide our investors with tailor made solutions that save them headaches!
As well as the standard legal process that comes with any investment, HMO investment also carries another layer of both legal and regulatory scrutiny. These regulations are in place to protect the tenant, but they also protect you the investor by giving clear guidelines as to your their responsibilities as a landlord.
Every investment carries a certain amount of risk versus a certain amount of reward. The complicated nature of the HMO process can deter some investors. But if you are prepared to stick with it, the rewards will certainly be worth the extra paperwork and maybe even the odd sleepless night!
Why should I invest in an HMO?
Investing in a House of Multiple Occupation (HMO) is a unique and diverse strategy that allows you to push the boundaries of traditional property investing. The concept of repurposing a building for the use of multiple occupants, or being able to charge rent for single bedrooms instead of the whole property comes with many benefits.
HMO Investing is –
The concept of a traditional buy to let property can be restrictive. The entire property is rented to one tenant, and the terms of a traditional lease can be limiting. With HMO investing, you have more options for how to rent out your property, and more flexibility over how you manage your contracts with tenants.
While the tenant is in a standard buy to let property, it is difficult to make any additional money over and above their monthly rent. The opportunity to make money from an HMO property is less restricted. From the increased premiums that people will pay for short term accommodation to the possibility of renovating an entire apartment block for one purpose, the extent of the profits you could make is greater than the traditional model.
Depending on the target demographic for your chosen area, there are many different styles of HMO investing that you can choose from. This allows for diversification within your property portfolio which will keep you more insulated from housing market corrections or downturns.
How Do I Choose The Best Location?
Where you decide to buy your HMO depends on a few factors –
Before you invest in any property, you must perform adequate due diligence. At Hoxton Property we undertake extensive research into the unique demographics of various locations to assess the most suitable for HMO investing. As well as being aware of who the potential tenants might be, you should also familiarise yourself with the local planning laws and regulations covering HMO ownership.
There is a style of HMO for almost every region. In the remote countryside, it may be that a local factory or farm has a huge need for workers and are currently spending too much on travel expenses. In cities such as London, there is a need for high-end luxury apartments for City workers to stay in during the week. The style and location of these HMO’s will of course be vastly different – so it is important to build your HMO model based on what the location needs.
Some areas of the country have much more attractive yields than others. Rental yields in the North are traditionally higher than in the South, but to get a complete picture you have to look at each local area. Assess whether the average rent in the area is comparable to property prices or whether there would be a huge demand for shared accommodation due to higher than normal rents.
Investors should make themselves aware of all these factors. If you don’t have the time to do so, we will help with pre-approved, fully researched and ready-to-go HMO opportunities.
How do I finance the purchase of an HMO?
As an ex-pat living abroad, your main considerations when financing an HMO are –
The first step before considering any substantial purchase should be to check your credit report in the UK. Living abroad can have a negative effect on your credit report, especially if you have not kept any UK bank accounts.
Obtain your report from Experian or Equifax and take note of any factors impacting your score. This small task can save you weeks or even months of hassle if you move forward and your eligibility becomes an issue.
An HMO is considered a commercial investment but be aware that the property might be valued in its current form as a residential dwelling. Commercial HMO mortgages require a much higher Loan to Value (LTV) ratio when purchasing so you will require a much larger deposit than with a traditional buy to let.
You will incur additional expenses throughout the licensing and approval process, as well as accounting for any structural or cosmetic changes that need to be made to convert the dwelling into an HMO investment. Our advisors at Hoxton can ensure that you are aware of all potential expenses and help you to plan accordingly.
As well as being a factor in the approval process for a mortgage, your ex-pat status will mean that your overall fees and legal costs could be higher. Paying for specialist advice from experienced solicitors is essential when buying from abroad.
You may need to be present in the UK for part of the process to instruct contractors or deal with onsite issues, so consider the cost of travel and all additional expenses that will incur. With Hoxton Property, this whole process will be taken care of.
How do I make money?
There are several ways that you can make money from an HMO investment.
Just as your ideal tenant will be unique, and your ideal property will be unique, your profit strategy will also be unique to this deal. Properties that require a lot of work have the potential for huge capital growth. Whereas cookie-cutter, move-in ready serviced apartments offer the capacity for instant income.
Deciding on which strategy is best for you will be a personal decision. Analyse your current circumstances and decide whether you are time-rich or cash-rich. Understanding your profile as an investor will also help you to decide just how hands on you want to be.
If you have the money to invest but do not want to deal with the sourcing, buying, renovating, furnishing and renting process, Hoxton Property has a solution for you. We have identified a way for our investors to profit from HMOs without legal complications and endless calls with mortgage brokers.
If investing in an HMO sounds like a great opportunity for you, please contact one of our investment advisors today who will advise you on our available HMO investment solutions.